Extract from ABC News
Analysis
The war in Ukraine suddenly has shifted from the battleground to the boardroom, the bourse and banks as Russian consumers prepare to enter their very own world of pain.
As the death toll mounts and the military onslaught continues with renewed vigour, Russia's central bank on Monday night was forced to hike interest rates from an already punishing 9.5 per cent to 20 per cent in a desperate bid to stabilise a shaky rouble.
Russia's currency, having continually plumbed new lows for most of the past three decades, slumped a further 30 per cent on Monday, adding to domestic inflationary pressure that could ultimately undermine support for Vladimir Putin, particularly among pensioners.
After suffering horrendous losses last week, financial authorities opted for safety overnight and kept the Moscow Stock Exchange shut, but this only created further angst for local investors unable to trade their holdings.
While Putin has long harboured an ambition to return Russia to the global superpower status it enjoyed before the Soviet Union was dismantled, he would do well to remember that its demise was brought about not by weapons and war, but through economic mismanagement and decay which ultimately led to a seething discontent across the Soviet empire.
The sanctions imposed over the weekend, limiting Russia's ability to control its economy and targeting specific banks, have been on the drawing boards for years, and have been formulated to create similar pressures.
The impact has been almost immediate. There has been a run on the banking system as households, fearing a banking collapse, scramble to secure funds.
But like all sanctions, their effectiveness will take time and will be determined by how united the West remains and the success of Mr Putin's attempts to navigate his way around them.
They haven't come as a shock. The Russian President has been preparing for many of these very sanctions for years and it is unlikely they will force his hand.
How do these sanctions work?
There are four main financial sanctions that have now been introduced by the West (the US, EU and their allies) against Russia.
- Removal from the SWIFT global payments system, the Belgian-based financial messaging system that allows more than 11,000 global banks to rapidly transfer cash between them.
- Preventing Russia's central bank from using its reserves of foreign currency, much of it parked offshore, to stabilise the rouble.
- Targeting wealthy Russians, particularly the oligarchs, and hindering their ability to access and shift their wealth.
- Freezing the foreign held assets of the political power elite right up to, and including, Putin.
The first two measures are the most important.
Under ordinary circumstances, removal of sanctioned banks from the SWIFT system has the potential to wreak havoc on the Russian economy.
Combine that with the hobbling of the central bank and there is a danger the Russian economy could endure intense pain, or even total collapse.
After decades of globalisation, even Russia is hooked into the global economy. While it is a major exporter of raw materials – minerals, energy and food – it requires large imports of high-tech componentry, even for some of its weapons.
If the rouble is worthless, that becomes difficult and, in the past few days, some companies have had difficulty arranging letters of credit, vital for trade.
Many large Western banks and corporations have already ceased dealing with Russia since the latest sanctions were announced, for both political and financial reasons.
Can Putin navigate around them?
In recent times, Putin has forged close links with China's President Xi Jinping and, clearly in anticipation of the past week's events, has hooked Russia's financial system up to a Chinese version of the SWIFT payments system.
Ever since 2014, when Russia took control of Crimea, he has been preparing defences against these kinds of sanctions.
He closed off access to foreign capital, imposed trade barriers and even developed Russia's own version of the internet.
Russia also ran a tight monetary policy, pushing interest rates higher than warranted, and crimped spending, which helped it build up a $US640 billion foreign reserve war chest.
But not all of this has gone to plan.
Thanks to the move to freeze Russian central bank assets, at least half of its foreign reserves now are inaccessible.
Despite its best efforts to cut itself adrift from America, it has large foreign currency investments held by central banks around the world which have agreed to the sanctions.
And while China's payments system will give it a backdoor to global finance transfers, roubles first will have to be converted to yuan which then will need to go through the torturous process of ultimately converting to US dollars.
That will be slow, inefficient and knock further value from the rouble. Plus, China's system connects just 1,200 financial institutions globally.
Inflation and shortages, an unhappy history
As anyone with some sense of Russian history knows, revolutions usually begin at the base.
The Soviet era may have ended when oil prices collapsed, taking Russian foreign revenue with it. But the rot was underway well before.
Externally, the edifice of power was maintained by huge military spending even after the failed Afghanistan adventure. But, internally, consumer shortages, hoarding and wage hikes stripped away by runaway inflation eroded confidence among workers, and support for the regime failed.
Mikhail Gorbachev's successor, Boris Yeltsin, ran into similar problems in 1998 after the war in Chechnya drained the nation's coffers and saw Russia default on its debts, sparking a financial crisis.
Back then, a rouble was worth US22c. Today, it fetches less than a cent.
The disquiet among Russians wasn't confined this week to those at the growing ATM queues or younger protesters storming the streets.
Two major Russian oligarchs, financier Mikhail Fridman and industrialist Oleg Deripaska, broke ranks with the Kremlin and voiced their concerns at the Ukraine invasion, suggesting differences are best sorted out through diplomatic and peaceful measures.
The founder of aluminium giant Rusal, Deripaska, in particular, has long been considered a key supporter of Putin.
For now, the Russian President remains supported by surging energy prices and his tight grip on internal security.
But his ability to maintain support and his position will hinge on whether those export earnings can be maintained and whether he can reverse the country's rapidly deteriorating economic fortunes.
Consumer shortages and rampant inflation. It's never ended well in Moscow.
